Deregulation of the various utility industries is creating new opportunities for utility customers to reduce their cost of purchasing water, electricity, natural gas and telecommunications services. Traditionally, because of government regulation, customers in a given geographic area were restricted to purchasing their utilities from single sources (i.e. there was no choice as to where a consumer could buy his or her power, all of a consumer's electricity came from a single local electric utility). Today, most power (primarily electricity) customers rely on what is referred to as “firm” power provided by their local utility companies.
Considering electricity as an example, “firm electric power” means electricity is delivered to the customer on a non-interruptible high-priority basis (i.e. 24 hours a day, 7 days a week throughout the year). Electric utilities must supply electricity to its firm power customers on demand. Because of its guaranteed availability, this is the most expensive long term contractual power a customer may purchase. An alternative to this is for the customer to purchase “interruptible power”. Because interruptible power rates are generally substantially lower than firm power rates, the customer can realize a significant savings. The downside to the use of interruptible power by the customer is that it may not be available when the customer needs or wants it and therefore the customer or the customer's utility provider may be forced to buy power from an alternative source (also referred to as “spot” power). Spot power is typically much more expensive than interruptible or firm power and it may not be economically feasible for a customer to buy spot power for short durations when their interruptible power is unavailable.
The distinction between interruptible electric power and firm electric power creates a two-tiered pricing structure for electricity as a commodity (there are additional sub-tiers such as industrial, retail, and utility-to-utility power). Traditionally, if an electric power customer wanted to take advantage of low cost interruptible power they would have to gamble that the additional costs due to having to purchase spot power during an interruption would not be greater than the savings attributed to using interruptible power. Because most interruptions in interruptible electric power are due to seasonal weather (heat in particular) changes it is possible to estimate from historical data how much spot power a customer may have to purchase during a given period of time.
One method of dealing with the risk interruptions would be to set aside, hopefully in some type of profitable investment, an amount of money equivalent to the estimated costs of purchasing spot power for the predicted interruptions. While a possible solution, this method would be difficult for the average utility customer to implement because of the lack of available information and skill with determining the frequency of interruptions. Another option, if available, would be to purchase interruptible power during the time of year when interruptions are unlikely and buy firm power when interruptions are likely to occur. While better than purchasing nothing but interruptible power, this method does not provide the same savings as it is possible to realize using a larger percentage of interruptible power and it is still possible to be surprised by interruptions requiring the customer to buy spot power.